Mainstream asset management has a record of brushing off crises. Not the oil price shock of the early 1970s, the recession of the early 1980s, the 1987 market crash, the economic downturn of the early 1990s or the dotcom crash of 2000 were enough to stop it in its expansionary tracks. However, a 30% fall in share prices since the start of last month has sent it into full-scale retreat.

It is not just that asset values are down, although this has a direct impact on fee income, most of which is charged as a percentage of assets under management. Retail investors have started removing their money and are set to continue, for at least 12 months after the market reaches its low point, according to equity analysts at Goldman Sachs.

Institutional investors are shifting their money from mainstream to low-fee, index-tracking products or to specialist and alternative managers, though not to hedge funds, which have fallen out of favour. Fee scales across the board are under pressures that many managers, having just made dreadful losses, are powerless to resist.

The equity market falls led Goldman Sachs’ equity analysts this month to change their predictions, saying they now expected assets under management, comprising all asset classes, to have fallen by 15% over this year, with further falls throughout 2009 as investors remove their money. They cut profit estimates for listed US asset managers so that, on average, they expect profits to be down by 25% by the end of next year.

European equity analysts concurred with the trends and overall scale of the expected deterioration for asset managers on their side of the Atlantic. Huw van Steenis and his fellow financials equity analysts at Morgan Stanley last week cut their 2009 estimates by 20% to 50%, saying they now expect asset management earnings for European managers to contract, on average, by a third between 2007 and 2009: “Top-line pressures from market declines, redemptions and negative margin mix shift will outweigh attempts to reduce costs.”

Andrew Kirton, global head of investment consulting at Mercer, said last week: “The asset management industry has become bloated by the good times and surely, if the world is rational at all, time ought to have been called on mandating for investment skill, but paying primarily for market performance. It would not surprise me at all to see another 10% of assets move into passive management and 10% in the opposite direction into high performance, specialist, opportunistic mandates, thereby intensifying the squeeze on mainstream, so-so, also-ran asset managers. More pressure on institutional mandate fees is likely. It would not surprise me at all if at least one and possibly more of the top 10 global asset managers were punished significantly in the coming environment.”

Pension schemes that have seen their carefully worked-up surpluses blown away in a matter of weeks have lost faith in sophisticated, expensive products that failed to protect them.

Jonathan Compton, managing director of UK fund manager Bedlam Asset Management, said: “Institutional investors are reverting to where they were 20 years ago, moving away from structured products, hedge funds and property and back into cash, large cap equities and bonds, with government bonds comprising a large part of that.

In the equity markets, all the silly products such as 130/30 funds have been blown away, people just don’t want to know, and the trend is to go either to unconstrained long-only products, preferably global, or to index tracking and do it on the cheap.”

Managers that have long resisted fee scale reductions now see it as a bargaining chip, and are putting it on the table in a bid to stem outflows. Craig Baker, global head of manager research at investment consultant Watson Wyatt, said: “Fees are coming down, in the alternative area first, but with a lot of mainstream products too.

Earlier this year it was difficult to negotiate fees down, now we are finding it a lot easier. It has become obvious that a lot of market performance was being dressed up as investment skill. There will be a lot of change to the structure of fees so that you are paying only for investment skill.”

However, some managers are backed into a corner because costs are not easy to cut. The loss of a large mandate or two, or a trading mistake not covered by insurance, could tip them towards insolvency. Investors that have focused on their managers’ investment performance are now looking at the managers’ balance sheets, fearing, at the least, that corporate trouble could take portfolio managers’ eyes off the ball.

Consolidation looks attractive to managers like never before, but the difficulties of integrating these people businesses means many firms will disappear. Christophe Bernard, member of the executive committee in charge of asset management at Swiss private bank Union Bancaire Privée, said he foresaw the number of traditional managers serving the retail market shrinking by 20% to 25%.

Charles Richardson, chief executive of UK fund manager Veritas Asset Management, said: “Asset management is fundamentally a healthy industry because it serves a real need. But managers will have a difficult time over the next 12 to 18 months and will have to cut costs.

“I don’t believe active management will lose out to passive management, because index-tracking exposes an investor to the full face of market volatility and is essentially an exercise in rearview mirror investing. Active managers can outperform the market but the problem investors have is choosing them. There are too many active managers and, in this environment, the strong will get stronger.

However, they may find that investors’ overall allocation to equities will be reconsidered and only those with well-defined active strategies and good performance in areas such as global equities will win new assets.”

Conversely, the turmoil may be good for investors. Kirton believes equities will come back for long-term investors and, over the next 10 years, might represent a great opportunity for them, if they have the courage, while carefully selected investments in corporate bonds, distressed bonds, property, infrastructure, global tactical asset allocation funds and even commodities and private equity might, eventually, prove worth investing in over the next 12 to 18 months.